Abstract

This paper explores the use of specific accruals in managing earnings. We argue that the costs of managing earnings through different income statement items vary and that the benefits of earnings management through each of these items are context-dependent. We thus make differential predictions regarding which specific accrual will be used to manage earnings in each of three contexts. To measure earnings management using specific accruals, we develop six performance-matched measures.

Consistent with our predictions, we find that firms issuing equity appear to prefer to manage earnings upward by accelerating revenue recognition, while the opposite is true for firms in the management buyout context. For firms trying to avoid reporting an earnings decrease, we find that special items are significantly more positive.

This paper improves our understanding of how the incentives behind earnings management affect the method used to achieve earnings goals and also illustrates the usefulness of examining specific accruals in different contexts.

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